business

Microsoft Brings the Works Online

The software goliath squares off with tiny online competitors, Google, andpossiblyitself

You might think the folks at Microsoft (MSFT) have bigger fish to fry than a tiny Bay Area startup named ThinkFree. The company, which offers Web-based word-processing and spreadsheet programs, counts about 60,000 active users, none of whom even pay for the service yet. But there on page six of Microsoft's annual 10-K filing with the Securities & Exchange Commission, submitted in August, Microsoft lists ThinkFree as a rival to its $11.8 billion Office business, used by more than 400 million people around the globe. "It's official now," laughs ThinkFree CEO TJ Kang. "We're definitely on their radar."

No kidding. Microsoft, which scoffed at the rise of online alternatives to Office, isn't looking the other way anymore. BusinessWeek has learned that the software giant is developing a strategy to put some of the technology from its Works software—the barebones word-processing and spreadsheet program that often ships with new consumer PCs—at the heart of a new online offering.

The company is working on plans to offer a free version hosted on its Office Live Web site, as well as a subscription flavor with more bells and whistles. While it's not a done deal, the company is throwing a lot of manpower at the project. "It's not a small number (of people working on the project) to be sure," says Chris Capossela, vice-president for Microsoft's Business Division Product Management Group. "This is core. We want to win this space."

WORKS ONLINE.

  Microsoft is still working out the details for its online offering. And nothing will likely be decided until after its flagship productivity software, Microsoft Office 2007, ships early next year (see BusinessWeek.com, 11/18/05, "Microsoft's New Word: Accountability"). But after that, Microsoft will likely put tweaked versions of the Works spreadsheet, word-processing, and project management programs on the Web.

It's a delicate dance for Microsoft, though. The company is keen to compete with new offerings from Google (GOOG) and others that provide free productivity applications online. But offering a rich set of services could undermine its lucrative Office hegemony.

The services will be designed to help consumers share documents they create and collaborate on projects with friends and colleagues, rather than just e-mailing files around. Parents can post soccer schedules for the kids. Small businesses can create customer contact lists for their employees. The Microsoft brass sees it as filling a niche the company's PC offerings can't touch. "The sharing scenario that the Internet offers us is an awesome opportunity to do things we aren't doing well today," Capossela says.

RISK OF CANNIBALIZATION.

  Bringing Works functionality to the Web is a tricky proposition for the software giant that threatens an existing business—with no guarantees that the new one will replace lost revenue. To see where Microsoft is headed, look at Office Live. That service, still in testing, offers companies Web hosting and e-mail with a personalized domain name. There is a free version, with five e-mail accounts, that's paid for with advertising served up by Microsoft. And Office Live offers a subscription version, which includes 50 e-mail accounts at a monthly cost of $29.95 once the trial period ends (see BusinessWeek.com, 9/13/06, "Can Microsoft Out-Google Google?"). With online word processing and spreadsheets, Microsoft would likely let Netizens choose from basic versions available for free and supported by ads, or subscription services with more robust features.

While there's some risk of cannibalizing Works sales, the bigger fear is draining users from Office. While the company doesn't break out Works sales, Goldman Sachs (GS) analyst Rick Sherlund believes that the retail sales of Works, at $49.95 a pop, are scant and the licensing fees from computer makers—which he estimates are between 50 cents and $2 a copy—don't add up to much, even when multiplied by the tens of millions of PCs that ship with it each year. But Microsoft will tread lightly with its online offering for fear of consumers using it instead of Office, which starts at $149 (see BusinessWeek.com, 2/16/06, "Microsoft's Office-Come-Lately").

FENDING OFF GOOGLE.

  Sherlund discounts that danger, saying Microsoft faces a much bigger problem trying to unseat Google. The Web kingpin generates more revenue from its search and other businesses than Microsoft does online, and threatens to extend that lead with new word-processing and spreadsheet services. To counter that, Sherlund believes Microsoft should go even farther than it's contemplating and offer much of the rich Office functionality online. That would be costly, but would put Google on the defensive. "You need to be aggressive in dealing with Google," Sherlund says. "Don't tie your hands behind your back. Come out swinging. Embrace the new model."

Such a strategy would only put at risk Microsoft's sales of Office to consumers, Sherlund figures, since businesses are typically reluctant to put corporate documents online. That amounts to roughly 6% of Microsoft's annual earnings—about $1 billion in the last fiscal year—money better spent putting Google at a disadvantage.

For now, that seems unlikely. But even if it's not the giant step some think Microsoft should take, there's little doubt that Google Spreadsheets—and ThinkFree—are about to get some new competition.

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